Sharp correction in mid & smallcap stocks may be a good reason to bet on them. Here's why

While a sharp run-up in valuations may have led to correction in mid and smallcaps so far this year, some market voices are still constructive on the segment right now.

“There is a lot of money that can be made when there is fear among investors, which holds true at this point. To a large extent, excessive valuations have drained out and they have good earnings trajectory ahead,” S Krishnakumar, CIO-Equity at Sundaram Mutual Fund told CNBC-TV18. He attributed the decline in this segment to valuation troubles, weak macros and drying up of liquidity from overseas.

So, how should investors trade in the current scenario? Are there specific pockets where leadership trends are emerging? Krishnakumar believes that it would be prudent for investors to have a diversified portfolio approach. Additionally, one could also look at companies with better balance sheets, among others. That is where the market will park its funds, he said.

He said that consumption was an overarching theme, which could span across auto, auto ancillaries, lifestyle, retail and brands, among others. These are the broad subsets that one could play with, he said, adding that infrastructure as a sector is also making a comeback. The expert is also observing recovery trends in industrial and capital goods as there are greenshoots in terms of orders.

Speaking on the rally in the information technology (IT) space, he believes that a large part of the trade has been played out. It surged on the back of support from cash flows, valuations, growth outlook as well as the weaker rupee. Going forward, the fund house would be selective in this space.